Seth Goldman and Barry Nalebuff founded Honest Tea in 1998. In the recently released Mission in a Bottle, the co-founders tell -- in comic book form -- the story of building a successful mission-driven business. Goldman, now president and "TeaEO" of Honest Tea, joins Motley Fool CEO Tom Gardner to discuss sustainability, entrepreneurship, and what it means for a socially responsible, health-oriented business to be bought by Coca-Cola.
In this interview, Goldman also talks about Honest Tea's origins and why its seemingly paradoxical relationship with Coca-Cola actually benefits both companies. He takes audience questions on water use and packaging choices, and what it means to be -- or strive to be -- a socially responsible company.
Tom Gardner: This is a pretty exciting evening, because we're fans at The Motley Fool of great businesses, and Honest Tea is great in every way as an organization. It's just great to be here with you, Seth.
I will say -- I'm putting a plug out there -- this is an absolutely fantastic book on entrepreneurship; 50% of it is about all the excitement of starting something you really believe in and care about, and 50% of it is about all the hell you face because you decided to go for what you believe in and build a business!
We're going to talk a lot about both of those, but I want to talk first, Seth, about the founding of the company. Feb. 22, 1998, you can't find anything to drink. ... Talk a little bit about the origins and the founding, and your partner, Barry Nalebuff.
Seth Goldman: It started with the fact that I was thirsty! There were a lot of drinks out there. There just weren't any drinks that were what I was looking for. I saw tons of sweet drinks with 100 calories per serving, and tons of zero-calorie drinks. I felt like, "Why wouldn't a drink have a teaspoon or two of sugar, instead of 10?"
In particular, I went for a run in Central Park and saw this problem, and I reached out to Barry; I said, "This is an issue." When I was a student, we had studied the beverage industry, and we had recognized that something was missing. At the time, I was trying to find a job, I couldn't do anything about it, but about two and a half years later I was ready to do something about it.
Barry not only agreed, but he had just come back from India, where he'd been studying the tea industry and he had a few insights. One was that most of the tea used to make bottled tea was really very poor quality. Instead of spending half a penny per bottle, if you spent four times that or five times that or eight times that, you'd still only be spending four cents a bottle. But he also came up with the name "Honest Tea." For me, that was like the clouds parting. It connected my interest in what we'll call a mission-driven business, and health.
Gardner: I'd just like to hear a couple of the jobs that you had, or experiences you had, that led up to Honest Tea, and then a couple of the jobs you had after the company started.
Goldman: I had absolutely no experience in the beverage industry. I think the closest was when I was 7 years old. I used to find golf balls in the woods -- I lived near a golf course -- and I would sell the used golf balls, along with lemonade, to the golfers. That was my beverage industry experience!
Other than that, I had worked on Capitol Hill; I worked for Lloyd Bentsen for two and a half years as a press secretary. I ran a precursor to AmeriCorps. I taught in China. I taught in Russia ... so I had absolutely a curvy path that led me to beverage entrepreneurship.
Gardner: And Barry's background -- your co-founder and partner -- maybe mention his interview at Harvard.
Goldman: Barry is very much an academic, and he's very much an out-of-the-box thinker. Sometimes I tell Barry, "Ideas are in the box for a reason."
When he was interviewing for Harvard Business School, they asked him, "Have you ever thought about going into business?" He talked about how he had this idea to sell fortune cookies to China. I think they felt like that's not a serious business idea.
Gardner: So, he didn't get a job at Harvard, but he taught at Yale, and you met him by being a student of his.
Goldman: Yes, I was his student at Yale, and we hit it off right away -- partially because my parents were both academics, so I was used to rigorous academic discourse. I didn't back down from it. Barry had a reputation of being a bit of a cold caller, a little tough on students. I would challenge him right back, and I think he appreciated somebody who wasn't afraid to argue about ideas.
Gardner: There was a little bit of an eye-opening experience for you -- the idea that you could start a business to change the world -- when you thought that wasn't the path that somebody who was really passionate about their beliefs and values would take.
Goldman: Yes. All my background had been in the public sector -- in government and nonprofit -- and I went to Yale thinking I would come back out and work in what was to become AmeriCorps, in the national service movement.
The first case study I picked up was the Rainforest Crunch case. It was a story about a Ben & Jerry's venture, a spinoff that didn't work out. But for me, I was just so struck that this was a for-profit -- or trying to be a for-profit enterprise -- addressing social and environmental issues. It really changed my whole mindset about the role of business
Gardner: What are some of the core values at Honest Tea that have been persistent since the beginning?
Goldman: It's interesting. Even if you were to go back 16 years before I launched Honest Tea and said, "You're going to be running an enterprise that's trying to remove billions of calories from the American diet, trying to spread organic agriculture, and trying to spread (audio drops) that don't have access to it ..."
I would have said, "That sounds like a great nonprofit, or a great government entity. What's the name of it?" I would have never guessed it was a beverage company -- and we joke that for the first 10 years we were a nonprofit, but not by design!
But we absolutely had that mentality. And we also operated on extremely modest resources. It's always been mission-driven along those three -- health, organic, and economic opportunity.
Gardner: When it comes to actually brewing tea to get started, where did you start, and what was the process of finding the right admixture?
Goldman: We literally started in my kitchen. We had an opportunity to present our tea to the Whole Foods buyer in Rockville, Md., so Barry and I took over the kitchen. We got five thermoses and lots of tea leaves, and all kinds of beakers -- basically bowls and tea cups; I don't want to make it sound too scientific.
Then we got an empty Snapple bottle that we pasted a label on. That was our sales model. It's worth saying that, in the middle of all that, my wife walked in -- it's such a poignant memory for me -- with our middle son. They had had an appointment with a doctor and he had been diagnosed with a cardiac ... his aorta was constricted.
So, on the day before I'm about to make what's easily the biggest presentation in Honest Tea's young history, we get this terrible news dropped on us, that our son is going to have to have major cardiac surgery within a matter of weeks.
Gardner: Talk a little bit about the role your family has played in Honest Tea -- your wife, your kids; some of the travel and experiences you guys have had.
Goldman: We include in the book, because it's absolutely part of the story -- I think John Lennon said, "Life is what happens to you when you're making other plans."
We were building this business, and life was happening. All of the risk was part of it. The family was involved. I think I did my best to shield them from the risk, but every time I'd come home and take a deep breath and my wife Julie would say, "Oh, what's the matter?"
I'd say, "Oh, ..."
She'd say, "I don't want to know. I don't want to know!"
Then that same middle son was the one who really pushed me to create Honest Kids, because he saw me putting sugary drinks in his lunch box and he said, "Why are you giving healthy drinks to adults and sugary drinks to me?"
Then, for me, the most rewarding moments were when we got to the tea-growing communities and I got to share and they got to experience what we were doing in these communities, and to connect with nature in a way that is just remarkable.
Gardner: Give an example of one of those communities.
Goldman: Still the most meaningful for our family -- we traveled to Darjeeling to a community called Makaibari. It was the first organic tea garden in India. The whole way they lived in harmony with nature is just so different.
One example; my son was taking a shower and there was a scorpion in the shower. He screamed -- because he had seen enough movies to know when you see that tail -- he screamed, and he was running around with a towel on. The owner of the tea garden said, "Oh, no. I've got one in my shower, too. He salutes me every morning and we just live together." I sort of found that hard to understand.
Two-thirds of the land is still rain forest. It's just incredible; there's monkeys around, there's noise, there's such diversity versus when you drive by the nonorganic tea gardens. It's a monoculture; they're silent. There's bushes, but there's none of that feeling of the life, overwhelming.
One other little story from there was a real lesson for us. Through our Fair Trade partnership, we saw there was a computer learning center we had supported through Fair Trade funds, where these children who grow up in what are mud floor houses can access the Internet and computers. You say, "Wow. That's an amazing thing."
My oldest son -- who is a bit of an anti-technology person -- thought "This is terrible. You're corrupting them." He'd seen all his friends playing Xbox and said, "These guys have a chance to live in nature!"
It's an interesting question. I said to him, "Jonah, but they're going to have opportunities that generations of their parents never would have had." Interesting lessons.
Gardner: It's a beautifully illustrated book. During the period where you're brewing the tea -- the two of you in the kitchen with hairnets on -- I was wondering if you ever thought that you guys are the value-loving, purpose-driven version of Breaking Bad?
Goldman: Right, the professor and the student? I don't know who would be who in that one.
Gardner: Interestingly, blind taste tests, which are frequently used in the beverage category, would fundamentally have knocked Honest Tea out, even before it even got out of the gate.
Goldman: Absolutely. Yes. What's so funny -- and I say this all the time with Honest Kids -- whereas most drink pouches have 100 calories, Honest Kids has 40 calories per pouch.
When we started working with Coca-Cola, they did some taste tests. I said, "Well, you just wasted your money. If you put a kid and you say, 'Do you like something twice as sweet or half as sweet?' what are they going to say? I could have told you the results."
But here's the thing. You put Honest Kids in a lunch box, and guess what the kid is going to drink? Because there's nothing else to drink. On the first day, he may say, "Oh, that doesn't have much sugar in it." The second day he'll drink it. By the end of the week you've changed that child's habits. If we're going to talk about taking our whole diet in a different direction, it's an incredible model.
And by the way, Honest Kids is -- I'm not bragging about it -- just because it's organic ingredients it's twice as expensive as the nonorganic, super sweet drinks. But it's grown incredibly. It's over a third of our business now.
To me, that's a very exciting direction. Obviously, our long-term goal is to get the price down, but to think about, if we can do that with the rest of the beverage industry, that's pretty powerful.
Gardner: How do you think America is doing with the move to a healthier diet?
Goldman: Going back to Honest Kids, when we started, all of the kids' drinks were at 100 calories. Since Honest Kids has been succeeding -- and I'm not saying we're the only reason -- but since Honest Kids has been succeeding over the past three or four years, the average calorie profile of a kids' drink pouch is now 75 calories.
Sometimes America doesn't even know they're moving in a healthier direction. Here's the situation. We're in a bad situation. The United Nations recently ranked the average life expectancy of all 200 countries.
Before I tell you where the United States ended up, just remember the United States is the wealthiest nation in the history of the world. We have more advanced knowledge of science and medicine than any civilization has ever had. We spend more per capita on medicine than any country.
But we're not No. 1. We're not No. 2. We're No. 40. So, what does that say about our diet? About our lifestyles? About our relationship with the natural world? About our relationships with each other? Instead of being No. 1, we're 40. It means we're grossly out of order.
Gardner: Out of curiosity, are we No. 40 up from 23, or 40 down from 72?
Goldman: At one point we were much higher. This is the first year that our obesity rate, nationally, has gone down -- so that is an improvement -- but the bad news is now Mexico is No. 1.
You've got a third of the population that's either obese or on its way to being obese. Diabetes is really an epidemic. We're nowhere near where we need to be. And it's not all diet; it's certainly not all beverage. It's a very complex problem with a lot of causes and a lot of different solutions.
Gardner: I want to go back to your story. Let's go a year in. You've got $1 million in sales -- exciting -- one year in, and you've burned through $300,000. You have $300,000 in losses and $1 million in sales. That's actually not unusual. That's a sign of success, in many ways, but how do you feel at that point?
Goldman: It was so terrifying because, on the one hand it is thrilling; we're growing and exciting things are happening. At the same time, payroll. ... What a lot of start-ups do is they raise a lot of money and they spend a lot of money. We never raised a lot of money, so it was always a week or two -- well, a month or two -- out from going out of business.
A great example of how I felt in that first year; we were at a family picnic. I was having a piece of pizza and I felt something crunchy in my mouth. I thought, "There shouldn't be anything crunchy in pizza." It was that my tooth had cracked.
I went to the dentist and she said, "I can tell you've been grinding your teeth at night. Are you under any stress?"
I said, "Yes, I guess you could say that."
She said, "Well, you've got two options. You can try deep breathing and yoga before you go to bed, or I can get you a mouth guard and you can chomp away."
I said, "Give me the mouth guard."
Gardner: Who were some of the initial investors of Honest Tea?
Goldman: The only ones who came in at the beginning were the folks who we could lose their money and we'd still get invited to Thanksgiving, which were my parents, Barry's parents, me, Barry, my sister, Barry's college roommates. Those were the founders.
Once we started to get some traction, we brought in investment from people who liked the product and who didn't want to see us go out of business. And by the way, those founders made 26 times their investment.
Gardner: That's awesome. We know one of them and love one of them, because she's come to our office a number of times -- Nell Minow. And Andrew Tobias also. They were just one step removed from your friends and family?
Goldman: Exactly, yes; didn't know them when we started. We had Berkeley Breathed, the cartoonist, who found the product and liked it, from Bloom County; a really unusual mix of people.
Gardner: Can you talk about the process of designing your product -- both the graphic design and actually the shape of the bottle -- and how you went through iterating and finding the best bottle?
Goldman: The main idea of Honest Tea at the time was just tea that was made with real tea leaves. That sounds simple, but most bottled tea was made with a powder or syrup, so it wasn't real tea leaves.
The design was intended to be simple and evoking -- maybe it's a Japanese esthetic -- just very simple and basic. We initially had hopes for a beautiful square-shaped bottle evoking either a fine vinegar or something like that, but when I went to the bottle supplier and he told me that was going to cost $128,000 and half a year to make I said, "I like the round bottle, very much." It was a combination of practicality and aspiration.
Gardner: Can you talk about one or two other examples where your dreams had to be put into the context of reality about the business?
Goldman: Sure. We were the first to make Fair Trade bottled tea. Back in 2003, we found a product -- Peach Oo-la-long -- that we could make with Fair Trade ingredients, so we said, "Well, if we can make one tea ..."
Fair Trade means not just that their working conditions are good, but a portion of the sales are going back to the community to support them.
We said, "Wow, if we can do it with one, why couldn't we do it with all of them?" And we looked at what it would take. First of all, the supply chain wasn't there, but even if it was, it would have cost more for us -- which meant we would have had to raise our prices or collapse our margins, either of which would have really defeated the business.
We said, "This is the path. We're starting with one step." It took us eight years, but in 2011, after Coke bought the company, we were able to make all of our teas Fair Trade certified. So, it wasn't a compromise. It was a practical step that got us where we wanted to go.
Gardner: One thing that comes through in the book is the brutal nature of distribution in the beverages industry. If we think about it, it's not something that changes very much. It's not like the Internet opened up this huge opportunity and a flood of new entrants came in. It's that there are 300 new beverage brands launched every year and there's a limited amount of shelf space out there.
Can you talk about some of the battles that you had? We'll tee it up this way. How about Honest Tea versus Snapple?
Goldman: Writing this was very therapeutic, because that was easily the biggest point of stress. We knew we had to get in with beverage distributors to build the brand.
We were in the natural foods channel, and that was good, but to get to the delis, to get to the supermarkets and gourmet shops, we needed to be on trucks that carried beverages because the product is heavy. There's no way we're going to ship it UPS, and obviously you can't ship it through the Internet like you guys can. We had to go to beverage distributors.
We went and, in some cases, literally begged. There's a scene with Barry on one knee, asking a distributor to carry us! And they'd say, "Well, the product's not sweet enough. It's too expensive." Or, "We have a contract with Snapple that prohibits us." We really were, in a lot of markets, locked out, so we had to find other ways to get around.
We would work with anybody who had a truck -- charcoal distributors, cheese distributors; we had a corned beef distributor -- anybody. A bagel distributor.
What was interesting was, eventually we were taking enough shelf space that some of the distributors who had the Snapple contract were willing to overlook that contract. It was an interesting evolution.
Gardner: Then another part of that evolution is that Snapple is acquired by Quaker Oats and tries to go it without distributors.
Goldman: Yes. They tried to go direct.
Gardner: Can you explain what happened there?
Goldman: Well, it was a great example -- and a real cautionary tale -- of the danger of being acquired and doing it wrong. They said, "We can make more money, we'll have more margin." They cut out the distributors, and the brand lost the soul, the entrepreneurial spirit.
There have been so many other beverage acquisitions that haven't worked, that it's certainly something I keep in mind -- as we started thinking about if we were going to sell -- making sure we ended up with a partner that wasn't going to mess it up.
Gardner: Andy Grove, the founder of Intel, wrote a book entitled, Only the Paranoid Survive. Did you get to points of paranoia along the way -- because there were some unusual things that happened -- that you maybe thought ...?
Goldman: No. I'm probably too trusting. That was my weakness.
Gardner: Barry was paranoid.
Goldman: Barry was paranoid! That why it was good to have a partner. Yes, there were a lot of times where I got close to making a deal that would have put us in the wrong direction, and Barry was just conservative enough.
A lot of times with private equity investors we got in situations -- one of which we share in the book -- where there was an investor who wanted to invest and set aside all these options for management. I'm like, "Well, what does that mean?" I didn't find out until later that meant it was options to attract a new CEO, so I was glad we didn't take on that ...
Gardner: There's not a lot of full disclosure "Honest Tea" -- enough of it -- in the private equity world.
Maybe this picture: You've got a successful product, now, out in the market. You're gaining distribution, and you wake up to the reality that operations are a bigger challenge than you had thought.
Goldman: The biggest mistake we make -- and I still sometimes wake up in a cold sweat thinking about it -- was we owned a bottling plant for six years. We had to figure out how to make the product. The first summer, we found an apple juice plant in Buffalo that was able to make it, and they did OK. They were fine.
But when they got to the fall and it was apple juice season, they were like, "Good bye, Honest Tea. We've got to make apple juice."
I'm like, "Well, we need to make some tea. If we don't have a product, we go out of business." So, in a moment of weakness we become investors in a bottling plant and, for six years, I was shuttling back and forth between Pittsburgh.
It's one thing not to have any experience building a beverage brand. It's another thing to not have any experience running a bottling plant, so we lost money, I lost time, energy, focus -- and there were plenty of other unsavory events.
Gardner: Actually, there was the national story that happened with glass in one of the bottles.
Goldman: That wasn't a national story. We had a situation where two different pieces of glass showed up in two different bottles, and we voluntarily withdrew. It was action we took ...
Gardner: Yes. But there was another company that didn't take that measure.
Goldman: That's right, yes. And they went out of business.
Gardner: Because more glass showed up in their bottles, and then it spiraled out of control.
Goldman: Yes. Whole Foods has a "three-strikes" policy. We were two strikes, and we said, "We're not going to risk the third." They risked the third. They were out.
Gardner: What about the process of raising money? We've talked a little bit about it -- the early round of investors -- but there's a lot of discussion about negotiation. For an entrepreneur out there who's thinking about raising their next round, what advice do you have for them?
Goldman: In the long term, we did the right thing by raising money just from angel investors. These were people who were friendly, but we were probably aggressive in what we thought the company was worth.
In one situation, we said, "We're going to say the company is worth this, and if we hit these goals, it's worth it. If we don't hit it, we'll take an adjustment down." The problem with that guarantee was the year we made it was 2001. We made it in June of 2001, and when 9/11 hit -- especially for the small companies -- the whole industry froze. Sales basically stopped. Our distributor in New York actually had a truck that collapsed under the buildings.
No one was answering. I couldn't even call people to say, "Do you want to invest in Honest Tea?" That was the downside of that approach. But in the long term, I believe we got across the finish line with control of the company because of the way we raised the money.
Gardner: How about the initial warrants approach? Can you explain what warrants are and how Barry thought ...?
Goldman: As one of our investors said, we had developed a structure that only a game theorist could love -- and Barry is a game theorist, so that was accurate. Most entrepreneurs, when they set up a company, they'll give themselves penny stocks. They'll start off owning 80% of the company, and then they go down from there.
We did the opposite. We invested at the same level as all of our investors, so we got diluted. But as the company grew in value, we had options to buy more stock. Actually, as the value of the company grew -- for a period of time -- our ownership grew, but no one was upset because we were growing the overall value of the enterprise. It aligned our interests with the investors'.
Gardner: You mentioned the difficulty of raising money in 2001. Then in October of 2001 you got a phone call, or a connection with the Denver police. I just want to say, I believe we have an adult audience here this evening, so feel free to give the NC-17 version of the story.
Goldman: In the big picture, we have some real fun cameos. There's a cameo by President Obama. There's a cameo by Oprah. The one I wouldn't have wished for was a cameo by Howard Stern.
What happened was, a guy went into a Denver 7-Eleven and he bought a product that was made at the bottling plant we own. The product wasn't Honest Tea, thankfully. It was called Ora's Potency Punch.
His Potency Punch was a little too potent. He thought there was a male organ in the bottle. There were pictures of it.
When I got the call from the plant manager, he said, "Are you sitting down?"
I said, "Yes. What's going on?"
He said, "Well, I've just got to tell you. There's this male surprise in a bottle."
I said, "Oh, my gosh. How did ... what ...?" I said, "Well, I better tell Denise" -- the other owner of the plant -- so I called her. I said, "Denise, I hope you're sitting down."
She said, "Oh, yeah, what's the matter?"
I said, "This guy bought a bottle of Ora Potency Punch at the 7-Eleven and it's too potent, and he thinks there's a male organ."
She goes, "What?" and she just drops the phone.
As she's doing this, the computer tech is in her office and he says, "Lady, is everything OK?"
She said, "You'll never believe this, but we have this bottling plant, and this guy went into a 7-Eleven ..."
He said, "Oh, yeah, and he found the male organ inside?"
She said, "How do you know?"
He said, "I heard it on Howard Stern on the way over."
Howard Stern was talking about it because the "segment" was only two inches long and Howard's like, "No one's going to confess that it's theirs!"
It turned out it was mold that took on that shape. That was one of those surreal experiences that you just cannot make up.
Gardner: There are some entrepreneurs who say, "If I had known what would have happened all the way through, I would have maybe not taken this all on." Is that true of you?
Goldman: I can say that I don't see myself doing it again -- there are serial entrepreneurs.
Part of it is, the first 10 years were just so absorbing and so draining. I'm so glad I did it, but you have to have that hunger. I'm still hungry and passionate -- I was up at three this morning, fired up about some things -- but there's an element of fear that you really need.
As you know, we were almost out of business the whole time. There's an element of fear that propels you, that you need to have. I don't want to sound like a masochist, but you need to have that, to drive it. I don't lead a cushy life, but I don't know that I'd be able to do that again.
Gardner: What was it in your negotiations with Coca-Cola that have protected Honest Tea? What makes you different than the other beverage brands that were once very popular and have somewhat faded? What has allowed you to stay true to your principles, and where have they been challenged?
Goldman: The main thing that I think makes it different is the way the investment was structured. Coke wanted to invest in and build the next billion-dollar brand -- but when they said "invest," they didn't mean "take it over."
When they came to us, they said, "Are you interested in working with us?"
I said, "Well, we need distribution help and we need investment capital, but we don't want to sell."
It worked out perfectly. They invested 40% and for the first three years, I was still running the business, and we grew. We scaled dramatically. Then when Coke had the option to buy, we all agreed this was working -- we're growing, we're getting more impact, we're gaining distribution -- let's keep going.
I don't know whether you call that a trial period or a dating period. It worked, and it's still working. I don't want to give myself too much credit, but our team is still intact; the whole team. Really, most of the same team, and there's no Coke employees -- well, maybe we're all Coke employees -- but there's no one from Atlanta working in our office. We're still driving the brand.
The points of challenge? We're part of a large corporation, so if you take an organic, Fair Trade, small entrepreneurial company and make it part of a large corporation that doesn't sell those kinds of products, we're not going to see eye to eye on everything. If we did, something would be weird.
Gardner: I like to ask the dangerous questions toward the end. I feel like I've earned some unfair questions. Feel free to dodge them. What would you do if you were the CEO of Coca-Cola and why aren't you? We would all want you to be, and I don't mean to knock the existing CEO of Coke ...
Early in the book there was a customer who said, "Do you call yourselves Honest Tea because you think everyone else is dishonest?" I wonder -- that tension that exists -- and I'm trying to dodge that a little bit by saying what steps would you take if you were the CEO of Coke?
Goldman: I actually think part of it is what they're recognizing: the world has changed. The beverage industry has changed. It has to change. Sodas -- no surprise -- have not been growing, and they're not going to be growing. Even diet sodas are in decline. So, you have to prepare for a different future.
That's what they did by creating this entity that invested in honest brands like Honest Tea. It's a great example of it.
I don't want to flatter, but I really am impressed with Muhtar Kent, who leads Coca-Cola, because he was the one who said, "Not only do we want to keep Seth around, we want to actually have him continue to hold equity in this company" -- so he appreciated what entrepreneurship means -- and it was only going to happen through his support.
If anything; I'm biased of course, but I'd say let's continue to accelerate these brands that are going to be part of the future.
Gardner: The fear that a consumer has, who loves the product, is that Honest Tea will be co-opted by the parent.
I'll give an example outside of the industry of just how wrong acquisitions can go. If you think about Lands' End -- that was a great business, for those of us who remember it, and then it was bought by Sears. I don't know who has ever shopped from Lands' End, ever since.
What is it that allows you to believe, or demonstrates, that Honest Tea is having an impact on Coca-Cola rather than Coca-Cola the other way?
Goldman: The first thing -- not that I'm not worried, but why am I more optimistic -- and the title of the book, Mission in a Bottle, means that the equity of the product, the value of the product, the selling proposition, is that it's lower sugar, organic, and Fair Trade. That's in the bottle.
It's not about the profits we give away. It's about every time we sell a bottle. If this is where the value is, one company that's learned not to mess with something that's working is Coca-Cola. Remember New Coke was not a very successful experience.
I'm not saying it's an impenetrable fortress, but in a way the best defense is a good offense and the more we build this brand -- and we'll do over $100 million in sales this year -- to get to this scale with these values, every time we go grow it makes it harder to strip away; and there's been no pressure to strip it away. I'm just saying, that's the value we've created.
Gardner: There was maybe one pressure point, and you stood up publicly, and your leadership team did. That was over the reference to high fructose corn syrup on the bottle. Tell us about that.
Goldman: Yes. Honest Kids -- the package -- on the front would say, "No high fructose corn syrup!" We started selling that through the Coca-Cola organization, so there was a question from Coke: "Hey, if we're selling this, we'd rather not have that on the package."
I said, "I understand. I'm not a scientist, so I'm not going to have a discussion about the science, but I do know the consumer views high fructose corn syrup as a processed sugar, and we're selling something that's less processed, so we're not going to take it off."
To their credit, they said, "Well, you're the owner at this point," -- this was when Coke had 40% -- "so we're not going to take it off." Then when Coke exercised the option, they still didn't insist on removing it.
Actually, just this year we removed all of the added sugar and we sweetened it with organic kosher white grape juice. Now the sugar, obviously, is in the grape juice and nutritionally it's the same, but as a result, the main language is now about "sweetened only with fruit juice." We have, on the side panel, "no high fructose corn syrup."
Gardner: Love it.
Last couple of quick questions from me, then we turn to the people who have great questions, in the audience. What innovations do consumers care about with beverages? Which ones do you go for because you believe in it but the consumer's not going to notice? Which ones do you think consumers either wake up to, or are asking for right now?
Goldman: The obvious ones are when you can combine taste and health. We just launched a line called Honest Fizz, a zero-calorie, naturally sweetened soda line that's done really well. It's being able to enjoy taste and flavor, and of course if it can be naturally sweetened or organically sweetened, that's a positive.
I think the other one is convenience. I'm not pointing the finger, but the fact is, consumers still like to have drinks on the go.
The one thing that's interesting, that we just started to do now, is sell in restaurants. Freshly brewed tea in restaurants is something that we're just starting, and we're really excited about that.
Gardner: My final question is what, Seth, at this point is motivating you? Most people who sell their businesses are no longer working at those businesses. Then there are companies like Berkshire Hathaway, where the acquisition happens and management stays. You stayed. You're making progress. It's been a great last couple of years since the acquisition for you all. What is driving you right now, and your team?
Goldman: The same things that drove me to start it. We have this incredible challenge in our country, and this is one step of how to address it. The other steps are the other things we can do with our business and we can do with our book. We can encourage and create a next generation of entrepreneurs.
And then the work that I do beyond Honest Tea; really, for the whole first year, all of the author proceeds are going to different charities. In tonight's event, we supporting a wonderful group called Urban Alliance which takes low-income high school students from Alexandria, and places them in professional job internships and puts them on a path to college.
This idea of, if we're in the wrong direction, anything I can do to get us in the right direction -- that's within by bandwidth; because there's only so many things I can address! I want to take steps to do that.
Gardner: I said that was my final question, but here's my final, final question; 20 years from now, what does the enlightened beverage drinker look like? What is enlightened beverage consumption?
Goldman: Well, I certainly believe and hope over 25% of the market will be organic. I would be surprised if the average calorie profile was more than 50 calories per 8 ounce serving.
The sweeteners are evolving a lot, quickly. Five years ago, there were no zero-calorie, natural sweeteners, and now you've got stevia. You've got erythritol. There's another one called the luo han fruit. I think there will be more zero-calorie, natural sweeteners.
I also think that the single-serve container is going to be much less prevalent. You'll see more in-home drink capabilities. Maybe it's out of your refrigerator.
Goldman: SodaStream, but even different than that, where your drinks actually come in cartridges. If you've seen the Freestyle machine that Coca-Cola has -- when you reload that, it looks like printer cartridges; bringing that into the home.
Gardner: Awesome. Time for some questions.
Audience member: Fantastic presentation. Thanks so much for being here; it's really enlightening.
Some people say that water is the new oil. I'd love to hear your thoughts on what Coca-Cola and you are doing to protect our water resources, and where you're going to get your water in the future.
Goldman: It's actually a really fascinating thing to watch. First of all, you've got to decrease your water consumption. And I'll be honest, that plant we owned back in the day -- "I'll be honest" -- I guess I'm sorry for that!
That small plant that we owned, terrible water use. We would use basically three times as much water to make a bottle. Now the ratio people look for is 1.5 or less. There's been a lot of advances, and Coca-Cola and the big companies are much more sophisticated than we used to be.
But beyond that, what they're really doing that's interesting is they've developed these solar water filtration stations in the developing world. In Africa and in South America, a solar powered water system, of filtration.
You hear the stories about people having to walk miles to get to a water source. Being able to set up really in areas where a community can gather, and taking action there; that's an interesting step.
It's impressive technology. It was actually developed by Dean Kamen, the same person who did the Segway and the dialysis pump.
To me, when I think about Honest Tea, where is our biggest impact on water, it's around organic. The chemical pesticides and herbicides that are used to grow nonorganic ingredients, they don't go away. They get washed away, but they get washed into water. They get washed into food supplies. So, for me, organic is a really important part of addressing global water issues.
Audience member: Seth, you worked on the Hill with Lloyd Bentsen. How has your view of government regulation changed, as you became an entrepreneur and now as a part of a much larger company?
Goldman: It's so interesting, and a surprise to me, because I always thought of government as sort of the path I would be taking.
What I've been so struck by is when I see, in government, how much compromise has to happen to get things done. I probably am peculiar, but I feel like I have compromised very little. Someone can say I'm compromised because I sold to Coke, but just as we shared in some of these examples, it's been really refreshing to feel like I don't compromise in what we do with our business.
I was just telling Tom about a national restaurant chain we're talking with. They said, "We really want to have organic Fair Trade tea. We just want your tea to be a little bit sweeter."
I would have given my left arm to be in this chain. I said, "Well, if you want sweeter tea, you don't want Honest Tea."
But to answer your question, for us, the government was so light. I mean, the bottling plants have to get regulated and certified and approved -- and thank goodness they do, because you still end with stuff in the bottle, even when you regulate it!
But for us, it was very easy. It was very light. I incorporated in Delaware. I had a lawyer help us, but it was easy. ADP did our payroll taxes; that was easy. Health insurance through a broker, so it really was very minimal. I totally appreciate that, and I don't take it for granted. As I said, I've lived in Russia and China. I've seen what an oppressive government can do. But for us, it was pretty much unfettered capitalism at its best.
Audience member: Wonderful and informative panel, thank you.
What would you describe your company culture as? How many employees do you currently have, and what is that relationship with Coca-Cola?
Goldman: That's interesting actually, because when Coke invested we had 47; today we have 112.
This is my belief, so you should ask them, but it is a very entrepreneurial, very free-spirited culture. I say "entrepreneurial" because we're not very stratified, but every manager has their own P&L that they manage -- profit and loss statement. They control their expenses. Their rewards and compensation are based on their performance of hitting their targets, and they control it all. We're not just practicing it, we're (unclear 00:41:40).
It's interesting, because before Coke bought the company everyone had options, and I thought that was the big motivator; literal ownership. But actually, since the transition we really haven't lost -- obviously there's some transition -- but there wasn't a big migration away, because people still got to have ownership of the business.
We are ... I don't want to use the word "cheap," but we live leanly. We still share hotel rooms when we travel -- which is not for everybody, but I can tell you it's a great way to weed out who's not going to be part of it! That's not for everybody.
Gardner: Shared rooms at the Four Seasons?
Goldman: No, if we're lucky it's a Hampton Inn!
Our office furniture ... I guess you can call it "reclaimed," as opposed to "used." But we also really do what we can to try to support people on their journey toward better health, and it's really exciting to see how people have empowered themselves to take really significant changes around that.
We have a company meeting that comes up every year, and it's kind of like a family reunion. The other thing we do is, when we launch in a market we all go out and travel to the market, and that's a great bonding experience.
Gardner: One of the things that's changing is that employees, past and present, are getting to review companies on sites like Glassdoor. I don't know if you've ever seen that site, but I recommend it to anyone who's looking for evaluating a company in any way.
It's anonymous, so the company cannot control what is being said about them, and there's a rating number attached to it. Honest Tea is very, very highly rated by the past and present employees of Honest Tea.
Goldman: And I just want to note that the book is dedicated to our employees because, although Barry and I certainly put our own energy and the capital in, the employees were the ones who made this happen and there's no other way to tell that story. In my favorite pages in the book, there's two superhero profiles, and they're both our salespeople, with their cooler bags, looking off into the bright future.
Gardner: Love it.
Audience member: First, I want to say you have a great smile!
Goldman: Thank you.
Gardner: Thank you! Oh, it was Seth? You were talking to Seth? OK. OK.
Audience member: I'm curious if that smile came before or after Coke's acquisition?
Gardner: That's awesome!
Goldman: I will say there's an optimism that you need as an entrepreneur, and I was born with that. One of the things that's important; we certainly lived simply before the Coke deal, and we continue to live simply. I think, to understand what makes you happy can be a real gift.
Gardner: Not having any personal guarantees for loans makes you happy.
Goldman: I slept better with no personal guarantees!
But I was happy before the Coke deal, and I was happy after the Coke deal. I have my own little equation. Happiness is the greater than, so what you have is greater than what you want.
Most people think having more makes you happy. But wanting less, and really understanding what makes you happy -- and for me, I've had an incredible, wonderful family and health ...
Audience member: I have to say it's probably the "no compromising." It goes a long way.
Goldman: That's right, too.
Audience member: Actually, my real question is that you chose an interesting form to communicate your story, which is a graphic novel. I'm curious why you chose a graphic novel over a standard approach.
Goldman: That son -- the one who was in India criticizing the computers -- is a very alternative thinker. He's dyslexic as well, so he's always seeing the world very visually. He was in his senior [year] of high school and was getting into senior slump, which means he wasn't doing his homework. He was reading comic books.
My wife would send me upstairs and say, "You better make sure he's doing his homework, because if he doesn't keep up his grades, he's going to lose his acceptance to college." I'd go up there and try to talk to him about doing homework and I'd see these comic books laid out, and they were so absorbing.
At the same time, I was trying to read these business books. One book in particular was just so ...
Gardner: Give us the title. I'm sorry! You don't have to do it.
Goldman: It was a green business book.
I felt like I was doing the homework. I said, "We've got to find a way to tell the story, and make it more engaging, to make it come alive," and the comic book form just worked. Whether it's the visual elements -- showing how we designed the label, or the tea garden, or the bottling plant -- and the kind of people we'll be able to attract is so different. It's really fun.
Gardner: I think it has to become an animated film. If you've read the book, it will be an awesome Pixar movie.
Goldman: I will say that my wife is not happy with all of the fashion choices made on her behalf.
Gardner: "Is that how you think I look, Honey?"
Audience member: A couple things; first of all, I found your Honest Tea at Whole Foods, and particularly liked the black tea, which I thought was superb.
Recently my youngest daughter, who's become a physical trainer, said to me, "Dad, thanks so much for not allowing Coke in the house. At the time, I thought I was really being deprived, but I realize now that you were doing the right thing."
It just occurs to me what an irony it is that you were bought by Coke. If you could just expand on that.
Goldman: Sure. Look, as you know -- and as your daughter knows -- they're very different products.
For us, it was always about scale. If we only had this model where we were selling to Whole Foods, and the co-ops -- which we love -- but if we were only selling to them or only selling on the coast ...
We have this mission. We talk about "democratizing organics." Why should healthier organic food only be available to the economic elite? From my perspective, they shouldn't be. They need to be available wherever beverages are sold. Who better to do that than the world's largest beverage distribution system? That was my take on it.
I recognize there's a little bit of a dissonance, but that's one of the reasons it works so well. If you look at Coke's portfolio, we offer a lot of things they didn't have. They didn't really have a strong tea brand. They didn't have an organic brand. They didn't have a Fair Trade brand. And we were a way for them to diversify their bets.
As long as the mission is still in the bottle, I want to sell it wherever Coke products can be sold. I want to sell it in Wal-Mart, I want to sell it in gas stations. I want it to be available wherever it can be available.
Goldman: The question was asked, where is Coca-Cola 20 years from now?
Gardner: How is "Honest Coke" doing, 20 years from now?
Goldman: I think that Coca-Cola is still an icon. It is, as a brand, the world's most powerful brand. I think it's still an icon. It's probably a little more of an indulgence beverage, as opposed to an everyday occasion. I do think the usage of it will change. I'm sure the company will still be there.
I think another thing that's important to recognize -- because we had some people say, "You should never work with big companies. You should never work with Wal-Mart."
I said, "These companies aren't going away." They are the ones who establish the infrastructure. Coca-Cola has more trucks than UPS and FedEx combined. Someone asked the other day -- just to give you a sense of scale -- how many servings of Coca-Cola products are sold every day, if you were to make a guess? It's 1.7 billion a day. That's a lot. We sold, just by scale, about 200 million servings of Honest Tea last year.
Gardner: That's still awesome, though.
Goldman: So, we've got a long way to go, but these companies are there. You can curse the darkness or light a candle. Let's try to evolve.
The other thing I believe is that these big companies -- I talk about the change that needs to happen in our society -- big companies are not going to initiate the change. But entrepreneurs can initiate it and, if they succeed, big companies will invest in them and then buy into a different future.
Gardner: What's the one reason you think that Honest Tea succeeded in the category where big companies dominate so much? What are the factors?
Goldman: We were meaningfully different. We were not a "me, too" brand. There's always the pressure to make it sweeter, make it cheaper -- but because we stuck to that, we stood for something that was different. It wasn't something they could copy. It wasn't just the ingredients; it was the connection to the consumer. It was the reputation in the marketplace. It was the authenticity we had built and stuck to.
Audience member: Thanks so much for a great presentation.
Socially responsible companies are often known for having double bottom lines -- sometimes triple bottom lines. Can you talk about how you managed those bottom lines when it came to decision making, and also perhaps give an example of a time where you had to make a decision where you favored one bottom line over another?
Goldman: Yes. If you will, let me just talk about terminology. I actually think there's no such thing as a socially responsible business. You can say it's a destination, but if you call yourself socially responsible, then you're not being honest with yourself, because every business has an impact and what you really need to be is engaged on a path to reducing that impact or improving the impact, if you think you're doing something positive. But if you think you're there, you're not being honest.
For us, we always have seen this as being a journey. We started with low sugar, then we went to organic, then we went to Fair Trade. We've done it around packaging, where we can lightweight our packaging.
But there are still trade-offs. One that was so vivid for us; when we created Honest Fizz, we wanted to make the product organic because since 2004 everything we've made is organic. We looked at the recipe for Honest Fizz and we said, "If we make it organic, we'll have to price it at $7.99 a six pack. If we make it nonorganic, we can price it at $5.99 a six pack." That's a very different cost when we think about trying to market soda.
What we said was, "We're not going to make it all organic." We made one of the varieties organic, and we have put ourselves on a timeline to get to be all organic -- and we literally say this on the package. We say, "It feels weird to have a product not be organic from Honest Tea, after doing only organic for eight years. But we have to evolve the supply chain," and as I said, with Fair Trade, we did.
There was definitely some sleep lost over that, but it felt like the right decision.
Gardner: That could be a system that you have put in place, which is to launch something that isn't where you want it to be, but to articulate that you're on a journey to get it there.
Goldman: Yes. I don't want it to be a precedent. I think the reason we were a little more comfortable was that soda is not necessarily a health occasion in the same way that tea is.
We know that people move to tea when they're on a path toward a healthier diet. They move away from sodas. They move, usually to a sweet tea, and then they move to Honest Tea. They're trying to get healthier; organic makes sense as a healthy part of that journey. Soda is not thought of as a health drink in the same way.
Audience Member: First off, again, I'll echo everyone's comments; great presentation.
My question is, is the new model now big companies are going to cut their own research and development, or their new ways of developing, and then just have teams looking for people to develop a new product?
Goldman: Yes! It's interesting, because Coca-Cola, and Pepsi and other companies, had done these little pilots where they'd create brands. It cost a lot of money, and it was synthetic. If you remember, there was a brand -- Fruitopia -- that Coke created. We were like, "What is that?"
So, yes, I think it makes a ton more sense because, first of all, think about just R&D expenses. We raised $10 million to create Honest Tea in the first ten years -- and we got to a success level, obviously -- but if we didn't succeed, that was $10 million Coke wouldn't have spent trying to develop a brand like that.
I think the kind of risks we're taking, and going into the market segments we're going into, aren't necessarily ones worth exploring. Let someone else endure the pain, and if it makes sense then it's worth buying.
For our investors ... we were losing money every year. "Why is this worth it?" Well, it's only worth it if we get bought. So, I do think that model -- that's how change happens. Maybe it's different with the car industry. Even Tesla, I guess, is going out and doing something. But in general, where the costs of entry aren't high it makes sense to let someone else do the R&D.
David Gardner: Seth, in a line that is misattributed to Mahatma Gandhi -- and it's there in any number of TEDTalks and other things -- "Be the change that you want to see in the world." It's still a great line.
Goldman: Yes. Who said it?
David Gardner: David Gardner, Google it!
No, somebody more obscure than Mahatma Gandhi. Part of your story I know -- Tom didn't tease it out of you tonight, and I don't know if you want to talk a little bit about it -- is that you were maybe more oriented toward thinking that the political world might be a place that you made the change in the world.
But instead, you started a business and you helped to reshape the world by doing that. I'm always telling my kids -- I realize that we're in the Washington, D.C. area, and I hope this isn't offending anyone; but I guess we're also across the river from Washington, D.C.
I always wish that my kids' schools talked about companies like Apple, Tesla, Netflix, Amazon.com, Google. The list, fortunately, goes on, of companies -- Honest Tea -- that truly change and shape the world around them. That's a great way to make an impact in this world. Do you think our schools do a good job conveying that? How did that light bulb ... how did you get switched on?
Goldman: Well, you're absolutely right. Obviously, for us, one of the ideas of the book is, "Let's make this accessible to people who don't think about it."
There was an interesting commentary on Slate.com by David Plotz. In this case, he called out liberals and said liberals don't do a good job of ... not just teaching their kids how the economy works, but thinking that this kind of work can be meaningful, and capitalism can have a great impact on society.
I think education, our approach to business, is dry. You can read a textbook and you can see supply/demand curves or cost of goods. What it totally misses, and what we hope to capture here, is the creativity and the fun. I've shared my pain points, but this has been such a wild ride, and so much fun.
The other thing that we get is this interaction with consumers. I still read all the emails we get -- and it's dozens a day now -- but we really are playing a transformational role in people's lives. That's just a wonderfully gratifying feeling and I don't think any of that really gets communicated in school.
Frankly, there just aren't books about entrepreneurship for kids, either. We did a little survey. I think there's a book about Facebook sort of targeted to kids, but it's really more about how to write a logarithm.
Gardner: It's funny. I actually have to laugh about this, but I think it would be a great animated film. I really do!
When you all buy and read the book, you will see that the visual elements tell aspects of the story that you can't get. As you said, seeing the design of the bottle, seeing the original bottle that you wanted and how it was not going to work economically, and what it changed to, and why, is all demonstrated in the book in a beautiful way.
Audience member: With the explosion of co-working spaces and incubators, how did ecosystems like Bethesda Green drive your growth, and how do you think it will help early stage start-ups today?
Goldman: Bethesda Green is a nonprofit that I co-founded in Bethesda. It started with the idea that we just needed a recycling business in downtown Bethesda. Then it mushroomed up, and we got the restaurants to recycle their grease.
Then when I went to what was Chevy Chase Bank and said, "We'd love you to be part of this," they said, "Well, we can't write you a check, but we have some office space. Can you use it?"
I said, "Not only will we use it for Bethesda Green, we'll create a green business incubator." We've got 16 entrepreneurs launching green businesses out of there, and they have all the benefits I don't have.
They have offices that's not a bedroom in the house. They have a conference room table. They have a mailing address that's not a P.O. Box -- which gives any supplier the willies, because they don't want to send a check to a P.O. Box, because they know they'll never get paid.
And they have the collaboration -- and the commiseration -- that you get when you're an entrepreneur, which is so important. I've been really excited to see these incubators spread.
I'm on the Maryland Governor's Economic Development Council, and I really believe it's an important model because not just where we need to change our economy is through entrepreneurs, but also through thinking about where the opportunities are, too. It's starting in small ideas.
Then just quickly, other companies that I've been involved with. I just joined the board of a company called Beyond Meat, which is a vegetarian protein alternative, really exciting. I'm a vegetarian, and they've got the right texture and taste.
I just was on a company that just sold called Happy Baby, an organic baby food company. We knew that the biggest trigger to going organic was getting pregnant and having kids, so organic baby food was right in the sweet spot.
Audience member: Tom, thank you so much for the presentation this evening. I find it terribly fascinating. My question goes back to what you originally said was the exorbitant distribution cost, for the distribution channel, to get your product out to the public. It also ties into the sustainability and futuristic views you see.
With home delivery systems such as Verismo, Green Mountain Coffee, SodaStream, MIO, what's holding Honest Tea back from that investment in a home delivery system for the product? Then also, to piggyback on that, what goes into the decision-making process to choose PET plastic for bottling as opposed to RPET, versus glass?
Goldman: First of all, the interesting thing about our product is this is actually a product you can't make at home in the same way. We use real tea leaves, and we're brewing organic tea leaves with organic sugar with water that's been purified in just the right way and boiled just the right way. You can't take that and make it at home the same way.
Certainly, you can bring home tea leaves and boil them and make tea at home, but you wouldn't be able to make it in the same quality. Our tea leaves our easily in the top 10% of tea leaves in the world. I'm not bragging; that's just a fact. There is actually a reason why we put it in a single-serve container. That's the reason why it makes sense for us to sell it that way.
The package -- it was a really interesting decision. We sell in glass and in plastic. Environmentally, I'm actually neutral on it, and I'll tell you why.
The glass bottle is laterally recycled -- glass can be recycled back into glass -- but a glass bottle empty weighs seven times as much as this package, which means that when we ship it around we can ship around 18% more of the plastic bottle than the glass bottle.
The problem with the plastic bottle is it's petroleum based, somewhat recycled, but mostly virgin material. The challenge there is we've got to find a way to use a renewable resin. And, actually, Coca-Cola was the first to bring out a plant-based material that is recyclable.
There are plant-based resins that are not recyclable, and to me that's a dead end. You put it in a recycling bin, you're contaminating the waste stream. You compost it and you've just taken energy and buried it, so that's the wrong thing. An important step that we expect to be at by the end of the year is a plant-based resin that is recyclable.
Gardner: I want you to close with how the beauty of innovation at a great company turns to things like upcycling and TerraCycle. Can you just close with that story?
Goldman: Sure, that's a fun one. Honest Kids is not recyclable. It's a drink pouch, and it's got a foil seam.
We didn't want to play a role in just having these -- we do play a role, but it's actually a very efficient package -- by weight, it's only 3% weight of packaging, 97% weight of liquid, compared to this, which is about 90% weight of liquid, 10% packaging. And by the way, the glass is 70% weight of liquid, 30% package.
Honest Kids is very efficient, but it's still not recyclable. We didn't want the pouches to go in the trash, if we could avoid it. We set up a program with a company that was just getting started called TerraCycle, where kids can collect the pouches in large amounts, send them in, and get a penny per pouch that they can use for the school or PTA or a nonprofit.
Since we started that program, more than 100 million pouches have been taken out of the waste stream, and we've got children thinking about their own role as waste creators, which has been a fun experience.
Gardner: Love it. Let's hear it for Seth Goldman!